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What to do with old private pension plans

Photo of Mark Meldon, IFA

The following guest post is by Mark Meldon, an independent financial advisor who has come on-board to explain some of the more obscure or technical corners of personal finance.

I began my career in financial services back in 1988, working at the head office of a long-gone life insurer in Surrey. I then joined an independent financial advisory practice in 1990 with a specific remit to advise members of occupational schemes about things like insurance policies and additional pension contributions.

Mainly, though, I was involved in arranging the new kid on the block – personal pension plans.

Private Pension Plans

In a certain guise, personal, or private, pension plans have been available in the UK continuously since the Finance Act of 19561 when what are known as ‘retirement annuity policies’ or ‘Section 226 policies’ were introduced under legislation. They were often marketed specifically at the self-employed.

Then, in 1988, personal pensions were launched to great fanfare. These remain available today, but much has changed over the last 30 years as far as charges, retirement options, and who offers them are concerned.

It isn’t my purpose to deal with too much history here (fascinating as it might be to me), but there are a few things that need to be understood regarding old policies that are gathering dust in the traditional box under the bed.

Sometimes – quite often in fact – gems can be found among those dusty piles of paperwork accumulated after years of neglect.

In order to keep things reasonably clear, let’s just call these ‘private pension plans’. Although there were distinctions between ‘S226’ and ‘PPP’ policies (the latter, for example allowed millions to ‘contract-out’ of the then state pension top-up scheme, SERPS), most of these have now vanished as legislation has changed over the decades.

What has not changed, with one very important exception, are the contract terms and conditions applicable to whatever plan(s) you might have2. This is the potentially very interesting bit!

Insured or SIPP?

Up until very recently, the vast majority of private pension plans were sold by life insurance companies. SIPPs (Self-Invested Personal Pensions), incidentally, are subject to exactly the same rules as those ‘insured’ schemes – they just have more investment choices and have become increasingly popular as administration and investment charges have been driven down by technological advances.

There are, however, millions of insured arrangements in the UK and, anecdotally, the majority of these are not currently receiving contributions. I think that there has never been a better time to look at these ancient policies to see how well they meet your needs.

Crucially, some might have very favourable guarantees that give certainty of payment throughout retirement, at a level that current investment conditions are unlikely to match.

That said some consideration should perhaps be given to rounding them up into a shiny new arrangement that can offer all of the flexibility permitted under the pension freedoms introduced in 2015.

If you think about it, a personal pension requires two basic things to make it work: administration and investment management. An insured plan bundles these two things together and can offer additional features such as life insurance and disability benefits (this is called a ‘waiver of contribution benefit’). Whereas, briefly, a SIPP separates these basic elements. You pay an administrator and you choose the investments.

I think the general perception that all insured private pensions are markedly inferior to a SIPP simply isn’t true, and I’ll try to explain why in a moment.

But first we need to look at who sold them.

Disruptive technology and administration costs

Looking at administration first, I remember filling in huge data input sheets in the new business department of that long-gone life office. These sheets were then sent off to a computer department that occupied a whole floor of a large building for an overnight run.

Whilst that makes me sounds ancient, those computers were state of the art then, albeit vastly inferior to today’s smart phones that we all take so much for granted. Such disruptive technology quickly overtook many life offices and made many of their products uncompetitive as far as administration costs were concerned. (Who would have thought of the impact of the likes of Hargreaves Lansdown and others back then, with the operating efficiencies their business model later introduced?)

Most private pensions were not sold through IFAs. Rather, in those days many life offices had huge direct sales forces. Indeed the number of  such advisers has shrunk by as much as eighty percent.3

Back in the early 1990s there were over 100 hundred companies selling private pensions. Today there are just a half-dozen serious players left in the market! Running from Abbey Life, Allied Dunbar, London & Manchester, NPI, Royal Life, Sun Life to Zurich Life, these so-called ‘zombie’ life offices have often been bought up by consolidators such as Phoenix Life and ReAssure. The consolidators now run hundreds of legacy books of business – and pretty well in my opinion, in the main.

These consolidators are subject to strict rules and conduct of business but are, of course, commercial organisations and need to make a profit. They do this from the multitude of plan charges and investment charges that came with these old policies.

Up until the abolition of commission at the end of 2012, the typical private pension might have the following charging structure:

  • A 5% bid/offer spread as an initial charge on every contribution paid.
  • A policy fee of £3 per month.
  • Contributions paid within an initial period defined in the policy conditions were often allocated to ‘capital’ or ‘initial’ units, which suffered an annual management charge of, typically, between 3% and 9%. Regular contributions paid after the initial period and single contributions were usually allocated to ‘ordinary’ or ‘accumulation’ units, which suffer an annual management charge of, typically, between 0.5% and 1.5%.
  • Providers used initial/capital units to recoup their expenses associated with setting up regular contribution pension policies and the cost of commission payments, which were substantially higher for regular premiums than for single premiums.
  • Alternatively, rather less than you paid was actually invested into ordinary units for a period of time – known as front-end loading – with the quid pro quo being that there were few, if any, early termination charges.

As far as the commission paid in those far-off days is concerned, let us consider someone deciding to pay a not unreasonable £250 per month into a private insured pension for 30 years. Based on the commission scales from the mid-1990s, the direct salesman would expect to be paid something like £2,900 in up-front commission, whereas an IFA rather less at something like £1,900 – the differential being explained by the fact that the direct salesman gives 100% of his business to the life office.

Now you can see why the charges were so high!

Had our investor paid a £3,000 single contribution, by the way, the commission would have been £240 for the direct salesman and £150 for the IFA. Hmm!

Investment management for insured pensions

The choices here fell broadly into two basic options: ‘with-profits’ and ‘unit-linked’, with the latter far more prevalent than the former thanks to the likes of disruptive innovators such as Abbey Life and Hambro Life (later called Allied Dunbar, now Zurich Assurance).

With-profits funds were, and are, substantial pools of money managed internally by the life office. Unit-linked funds came in various flavours such as a Managed Fund, UK Equity Fund, Property Fund and others.

The most commonly perceived difference between with-profits and unit-linked investment is that the value of unit-linked policies is more volatile. This is because the policy value is obtained by multiplying the number of units held by the prevailing published bid price, which fluctuates directly in line with the market value of the assets held in the fund.

The return achieved, therefore, directly follows market conditions and volatility can clearly be seen though variations in the bid price of units. I have always found this a rather more transparent approach to investment.

By contrast, the value of a with-profits policy is largely determined by the insurance company and is not directly related to the value of the underlying assets of the with-profits fund. Instead, insurers allocate a return through the mechanism of bonus declarations, which aims to smooth out the volatility in the value of the underlying assets. This conservative approach was favoured by many IFAs back in the 1980s and 1990s but is rarely available today.

Traps for the unwary

You might think that all old insured private pension plans are terrible, but that isn’t always so. For example, many policies have valuable features that are just not available today.

Indeed, some are extraordinarily attractive.

For instance, up until the mid-1990s, many life offices offered a ‘guaranteed annuity rate’ on their policies. Simply put, you can take a fixed secure income for life from the policy when you reach retirement age. Sometimes this so-called GAR isn’t actually much use in the real world, as it might only be available as a pension paid annually in arrears with no options like a spouse’s pension. However, many do offer flexible options – you really need to check.

A couple of years or so ago, I advised a client to exercise a GAR which gave him a return of 16% on his fund! From an after tax-free cash fund of £85,000 or so, he has already been paid gross income of £27,200, and he is only 67 – amazingly, that is around 3.5x what he could buy today from a pension annuity on the open market today. Bearing in mind that he only paid in around £12,000 in net contributions to the plan back in the 1980s, I can only say “kerching!”

Many old policies I look at also offer insurance benefits like life cover and ‘waiver of contribution benefit’ – the former is often rather expensive but the latter means that the insurance company will effectively pay your pension contributions on your behalf if you suffer from long-term ill-health. I had experience of a lady who became ill and her pension payments continued for 12 years under this provision.

Marketing gimmicks were common, too – loyalty bonuses, charge rebates and the like. I have a handful of clients who set up private pensions with what was the Sun Life in 1992 and these policies were all set up to finish at age 55. Two of these clients have long gone past that age but have kept the policies up and they now benefit from ‘Extra Fund Injection’ (remember all those ‘EFI’ badges on the back of cars in the early 90s?) which effectively wipes most of the policy charges and makes their contracts very attractive even in comparison with today’s low-cost options.

However, I have looked at hundreds of old private pensions over the last 15 odd years and most, unfortunately, are pretty poor value, exhibiting high cost, mediocre investment returns and no special features.

I’d say that my advice has been to ‘hold’ about a quarter of the plans I have investigated in detail and to ‘fold’ three-quarters into a better value contract offering access to all currently permitted options on retirement. About half of these funds are now in a SIPP wrapper and the other half (generally the smaller funds) in insured policies.

Good news and what to do

The good news is that it is now much easier to fold an old pension into a new arrangement as the FCA (Financial Conduct Authority) introduced a 1% maximum exit charge rule in April. That is now the most a life office can charge on exit. (That said, at least half of the plans I have looked at didn’t have exit charges anyway.)

To undertake what I call an audit of old pension policies is rather complex and time-consuming. But you could do it yourself and here is what you need to do.

1. Obtain a projection of benefits from your existing private pension plan provider. This will effectively confirm the charges on your contract, the current fund, and transfer values, but you will need the life office to firm up details (see below).

2. Undertake an initial assessment of the charges, paying particular attention to the ‘reduction in yield’ (RIY) and transfer value figures. Also refer to fund charge information and with-profits guides.

3. Alternative illustrations should then be sourced from potential alternative providers using today’s different charging regimes. It’s certainly worth asking the current provider for a so-called ‘existing business illustration’ if the firm is still accepting additional contributions – many will not take increases where high guarantees feature in the policy.

4. You then need to do a detailed product charge analysis. Most IFAs will have some groovy (and quite expensive) software to do this, but you might need to set up spreadsheets.

5. For with-profit investments you need to:

  • Analyse independent fund ratings, and financial strength of the provider;
  • Consider the provider’s bonus track record;
  • Analyse the asset mix of the fund. Does it still meet you requirements, does the annual management charge represent good value for that asset mix?

6. Then you need to factor in any special features mentioned above as objectively as you can in the light of your circumstances now.

7. Eventually, you can make some kind of reasoned decision about what to do.

Alternatively, you could hire an IFA to do all of this heavy work for you. They are likely to have access to industry tools that you can’t get hold of and will have plenty of subjective experience on which to draw.

Whether to Hold or Fold an old pension plan is ultimately your choice, but I do think the decision needs to be carefully thought through. There are a multiplicity of factors you need to take into account, as I hope I have demonstrated.

Please note: The article above ONLY concerns ‘defined contribution’ or ‘money purchase’ pension plans. These can be personal pensions, company-sponsored schemes, AVC’s, FSAVC’s, Executive Pensions, and stakeholder plans. It does NOT concern defined benefit or final salary pensions – that’s a much more complicated area.

Mark Meldon is an Independent Financial Advisor based in Cheddar, Somerset. You can find out more from his company website. You can also read his other articles here on Monevator. Let us know if there’s something you think Mark could cover in the comments below.

  1. Source: Personal Pensions Handbook & Unit-Linked Survey 1994/95. []
  2. The exception is it is now much less onerous to fold an old pension into a new arrangement, thanks to a 1% maximum exit charge rule that was brought in by the Financial Conduct Authority in April. Previously charges could be 20% or more! []
  3. Source: Personal Finance Society 2016. []

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{ 16 comments… add one and remember nothing here is personal advice }
  • 1 Passive Pete July 13, 2017, 9:58 am

    Thanks for the interesting article. I’d support the recommendation to check out the ‘box under the bed’. Despite originally being a professional accountant my wife has now no interest in financial matters and she has changed career to be an academic. Therefore I recently undertook an audit (yes, I’m an accountant too) of her old pension plans which she considered to be almost worthless as she’d stopped working in the late 1990’s to look after our son, done voluntarily work and studying. It turned out she has an extra pension she thought had previously been consolidated, and despite only contributing for a year it’s transfer value is £75k! It is a final salary scheme and as the value exceeds £30k she needs to receive advice from an IFA in order to proceed.
    That’s not a bad find among the dusty paperwork

  • 2 The Investor July 13, 2017, 11:37 am

    @Passive Pete — Wow! That would be a *gasp* find on the Antiques Roadshow for sure. 🙂

  • 3 Stephen July 13, 2017, 12:28 pm

    Mark, thank you for an excellent and very timely article. I am currently tangling with Standard Life to get the details of my wife’s various with-profits pensions with them. Trying to unpick the details and the guarantees is harder than astrophysics and they seem to consider it impertinent of their customers to ask questions about their policies and terms. So this article was very helpful in thinking through some of the questions, thanks and do write more on this subject.

  • 4 Mark Meldon July 13, 2017, 1:30 pm

    @Stephen,

    As Standard Life is merging with Aberdeen Asset Management (and is rumored to be sniffing around Scottish Widows, too!), the firm would seem to be setting itself up as an investment company rather than a provider of “traditional” life office things like personal pensions.

    Many with-profits Standard Life pensions have a guaranteed annual growth rate of 4% which is pretty attractive, I think. Tread carefully!

  • 5 Almost retired July 13, 2017, 2:10 pm

    Thanks for article. I have several PPPs including a S226 with profits policy with the Pru. Its due to start in a few years time although I’ve had to cease contributions to take advantage of Fixed Protection 2016. So far I’ve been advised to hang onto The Pru policy because of the various bonuses (some of which are guaranteed) it includes on the basis that these would be lost if the transfer value were taken elsewhere on the assumption that the bonuses probably outweigh any advantage of moving the funds. It does however seem to be fiendishly complicated to get actual figures/forecasts to verify this.

  • 6 Trevor July 13, 2017, 2:22 pm

    I was considering moving my pension from my last employer to my current as there are no extra features, however the main thing stopping me is if the pension provider goes bust what happens to my pension? I have checked http://www.pensionprotectionfund.org.uk/Pages/compensation.aspx which states “When you reach your scheme’s normal retirement age, we will pay you compensation based on the 90 per cent level subject to a cap”, so with two pensions I would get 100% of one and 90% of the other, but if I merge them I would get 90% of all… or am I misunderstanding?

  • 7 Mark Meldon July 13, 2017, 2:43 pm

    @Trevor. Try this http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/common_misconceptions.pdf
    Less than 0.5% of people in the PPF are caught by the cap. Why do you think your previous scheme is at risk – if you are worried, ask the Trustees (assuming a DB scheme involved).

  • 8 Alex July 13, 2017, 2:53 pm

    If you are a public sector employee you still have the ability to set up a “traditional” AVC with guarantees. Though they are not as good as policies set up in the olden days.

    In most cases it’s with the Price, and has:
    – no initial fees
    – .5% reduction on annual fees
    – the ability to “buy” an annual income by rolling it into your occupational scheme at retirement
    – a guarantee by the government of any pension payable in retirement.
    – no fees to transfer out.
    – flexibility under the new pension freedoms
    – if you choose with profits rather than unitised, a guarantee of no MVR on your retirement date.

    Whilst not as good as some of the “old” policies, there are plenty worse ways to top up your occupational pension.

    If you were feeling really cheeky, you could put the “bond” portion of your portfolio in the with profits option and take advantage of the no-MVR guarantee and “no reduction” guarantee and (theoretically) have a higher chance of higher returns than a bond tracker, with reduced risk of losing any value.

  • 9 Paul July 13, 2017, 3:42 pm

    I went through this process a year ago with an Allied Dunbar plan that was offered to me by my employer in the ’90s. As a 20 something who didn’t know better, I went ahead with the plan on the advice that it was better to have a pension with employer contributions (of 2% pa).

    To your point:
    – Alternatively, rather less than you paid was actually invested into ordinary units for a period of time – known as front-end loading – with the quid pro quo being that there were few, if any, early termination charges.

    Subsequently I discovered that 65% was taken out in charges for the first 1/12 of the pension contribution term, which applied both to the initial payments and to any subsequent increase, (max 30 months for 30 year plan), so yes, front end loaded doesn’t quite cover it. If it was a ship, it would have sunk as it went down the slipway.

    I had a projection done by an IFA, and although the final figure for staying was similar to the projection for a SIPP, by then I had lost all confidence in a provider who charged me that level of up front fees (that was never mentioned by the AD salesperson at the time) that I was going to get a fair deal, so I moved. At least I now have some measure of control, and I know that contributions I make will compound from the start.

    The big problem with front end loading is that it hits investment returns hard.

  • 10 Alan July 13, 2017, 4:36 pm

    With the LGPS your AVC can be taken entirely tax free as part of your overall 25% TFLS.

    Pot value is calculated as (20x Annual Pension) + AVC Fund Value.

    Good deal for BE taxpayers, fantastic for HE taxpayers.

  • 11 Mark Meldon July 14, 2017, 9:23 am

    @Paul. Several life offices used “front-end” loading with PPP’s, particularly from the mid-1990s to around 2001 (when stakeholders were introduced). Eagle Star, Allied Dunbar, Skandia Life and several others spring to mind. Whilst I take your point about a sinking ship, it is actually the case – if we set aside matters like investment returns and service standards just for now – that some of these plans have turned out rather well for those who have stuck with them. In most cases the low allocation period was relatively short – maybe 2-3 years – and after that 105% of the monthly contribution would be added to the fund, thus eliminating much of the initial charge. These plans also tend to have quite low annual management charges. Indeed, several versions of the Allied Dunbar plan had no charges at all if you kept the think going after the “selected retirement age”. Whilst I have never worked for Allied Dunbar, I know that many who are IFA’s today did and the Company regularly set PPP’s up to “mature” at age 50 – younger than permitted for most today – so these contracts are remarkable value (akin to those BoE – 0.50% mortgages that used to be around) if you still have them.

    You need to look very carefully under the bonnet.

  • 12 Mr optimistic July 14, 2017, 9:44 am

    I have two plans like this stemming from pension schemes I left in the 80’s. They have guaranteed growth and annuity rates of 8.5%. Unfortunately the CETV offered is only 20:1 in both cases and neither offer any protection against inflation. Bit of a conundrum as to what to do as retirement less than two years away. Still, can’t complain, £300 in 1983 has become >£2600 pa.

  • 13 Paul July 14, 2017, 5:41 pm

    @Mark Meldon. thanks for your response. I did look at under the bonnet pretty carefully. There was indeed a 105% contribution beyond the initial period, there was also a 5% bid offer spread for every investment, so this cancelled out. The plan was set up with an age 60 retirement age, so I was not able to benefit from lower or no charges beyond 50. Also any new contributions made beyond the given retirement age would have had to be made under a new plan with the same initial charges, at least until other pension options became available later. There was additionally a 1% AMC outside the intial period if you stopped making contributions, which was otherwise reinvested if you continued to make contributions. There was additionally a £4.73 per month (increasing with inflation) admin fee. There was also a £43.82 fee for switching funds (increasing with inflation).

    I always thought it somewhat ironic that their advertising at the time for this, the ‘Adaptable’ Pension Plan, and other pension products, touted “for the life you don’t yet know”. Ironic, because the only way to get a decent return was to stick with the plan until retirement, come what may, so you knew you had to stick to the plan for years, one aspect of your life that you really did know. I don’t think I am the only person who found the whole process less than satisfactory: http://www.telegraph.co.uk/finance/personalfinance/pensions/2844982/Pensions-a-little-man-fights-back.html

    It is partly for this reason that I come to this site which offers transparency and sound investment approaches.

  • 14 Noedig July 15, 2017, 6:39 am

    Mr Meldon – thank you for the article.

    When I looked into my fragmented PPPs a few years back I found one with a projection having a *decreasing* value – because of the (one might say usurious) charges of the scheme. I imagine this is not entirely unusual. After a pronto transfer into a SIPP with Sippdeal I decided the closed-life-insurance industry was such a racket relying on sleepwalking customers, that I invested in a closed life management company Chesnara – which seems to be doing very well (but I can guess the source of the profits are the retirees having their pensions leached away).

  • 15 Pinsticker July 15, 2017, 1:09 pm

    Thanks for the article.

    Paul – Allied Dunbar was also known in parts of the industry as Allied Crowbar. Deservedly so.

    General Portfolio was my own particular bete noire. Luckily, I came to my senses after making around 5 years of contributions and cut my losses.

  • 16 Mark Meldon July 17, 2017, 12:58 pm

    @Noedig – I think you are spot on with your comment regarding the “consolidators”! My main concern in writing the article was merely to say “look before you leap” with old DC pension funds. I’d agree that the majority are, frankly, rubbish. These mainly originated with the old direct-to-customer (as it would be called today) companies – who remembers Cornhill, Criterion, Devonshire Life and Providence Capitol nowadays? In my experience there were some relatively decent contracts around for the IFA market, but we need to remember that we are going back 30 years and more when the world was a very different place as far as technology and the commensurate savings this has (eventually) brought to consumers.

    @Pinsticker – Allied Dunbar (now Zurich Assurance) were really much, much better at life insurance than pensions in the bad old days. Indeed, the company is still very good at underwriting very large cases and is one I use in this market – not for pensions though.

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